Why taking Social Security at 62 might make sense for you. Even if the ‘basic math’ says otherwise
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If you’ve spent any time planning for your retirement, you probably know the basics of Social Security. Most people can begin receiving benefits at age 62 and delay benefits until age 70, reaching full retirement age (FRA) between 66 and 67, depending on their birth year (1).
The longer you wait, the larger your monthly payment will be; According to the Social Security Administration (SSA) (2) delaying your FRA can increase your earnings by up to 8% per year.
This seems like a big deal on paper. However, in practice the decision is more complex and for some retirees the delay may be costly.
This is why the simple math behind delaying benefits doesn’t always work.
The problem with the “basic math” behind delaying Social Security is that it often overlooks longevity risk. While it’s true that waiting longer increases your earnings, your total lifetime earnings may be lower if you don’t live as long as you expect.
For example, if you wait until age 70 to start receiving benefits but die at age 72, you will only receive two years of benefits. Claiming sooner, even at a lower rate, could have resulted in a larger total payment over your lifetime.
If you die before age 70, you get virtually nothing from the system you paid into for decades.
Moreover, the fate of the program is also being questioned. Underfunding could lead to the program depleting trust funds by 2032, which would lead to a 23% reduction in benefits for retirees and the disabled (3). With this in mind, many Americans approaching retirement make some complicated calculations about how much they can expect to earn and how long they expect to live.
To be fair, predicting longevity is inherently uncertain. According to the Peterson-KFF Health System Tracker, life expectancy in the United States is approximately 78.4 years; however, individual results vary greatly (4). Many people live into their 80s and 90s, with some not reaching average life expectancy.
To help overcome this uncertainty, many financial advisors use “breakeven age” analysis. This calculation estimates the age at which cumulative benefits from deferring Social Security exceed those previously claimed.
For example, someone who is eligible for $2,000 a month at full retirement age of 67 would need to live longer than 78 years and eight months to get ahead of the curve compared to claiming benefits at age 62. If they wait until age 70, the break-even age increases to approximately 80 years and five months (5).
But even this analysis has its limitations. It generally does not take into account the time value of money or the opportunity cost of accessing and investing in previous benefits. Trying to time the break-even age also assumes that you have a nest egg to lean on—nearly four in 10 Americans don’t, according to an analysis by Gallup (6).
If you retire at 62 but delay claiming Social Security until age 67, you may have to withdraw money from your savings or tax-advantaged accounts such as a 401(k) to cover your living expenses. By doing this, you give up the potential investment returns these funds could earn if left untouched.
This trade-off is known as opportunity cost and is an important factor to consider in retirement planning.
When you include opportunity cost in your break-even analysis, the age at which it becomes advantageous to delay benefits can be pushed significantly further.
For example, someone eligible for $2,000 a month at full retirement age of 67 would need to live approximately 88 years and eight months to reach break-even age, assuming a 5% annual return on their investments.
If the expected return is 8% per year, the break-even point may not be reached within a typical lifetime. In other words, taking benefits earlier while keeping retirement savings invested may provide a better financial outcome in this scenario.
But once you realize your break-even point, there are ways to reduce the opportunity cost.
If you choose to delay Social Security, you’ll need a significant emergency fund saved to avoid withdrawing money from your investments for as long as possible. Of course, with so much money saved, you’ll want to make sure it keeps up with inflation.
A high-yield account like this Wealth Front Cash Account It can be a great place to grow your emergency fund because it offers competitive interest rates and easy access to your cash when you need it.
The Wealthfront Cash Account can provide a base variable APY of 3.30%, but Moneywise readers can get a 0.65% increase in the first three months. total APY 3.95%. That’s more than ten times the national deposit savings rate, according to the FDIC’s January report.
With no minimum balance or account fees, 24/7 withdrawals and free domestic bank transfers, your money always remains accessible. Plus, Wealthfront Cash Account Balances up to $8 million are insured by the FDIC through program banks.
Because the basic math behind Social Security decisions often ignores key variables and predicting factors like investment returns and longevity are inherently uncertain, working with a qualified financial advisor can be a smart move.
A professional planner can help you account for additional considerations such as inflation, estate planning, health care costs, and annual spending needs.
With PioneerWith , you can connect with a personal advisor who can help you assess how you’re doing so far and make sure you have the right portfolio to achieve your goals in a timely manner.
Vanguard’s hybrid advisory system combines advice from professional advisors and automated portfolio management to ensure your investments work to meet your financial goals.
In conclusion? Oversimplifying your retirement strategy can be costly. A more comprehensive and personalized approach can help you make more informed decisions and improve your long-term financial outcomes.
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